WDC: Craig-Hallum Ups to Buy, $54 Target; SSD, Tablet Risks Priced in

By Tiernan Ray

Shares of disk drive maker Western Digital (WDC) are higher by $1.43, or almost 4%, at $41.03 after Craig-Hallum analyst Christian Schwab raised his rating on the shares to Buy from Hold, and raised his price target to $54 from $31, writing that “the December quarter is tracking at least to street expectations and estimate cuts in the near term have subsided.”

Schwab is modeling $3.61 billion in revenue and $1.76 per share in profit in the fiscal Q2 that ends this month, which is slightly below the average estimate on the Street of $3.66 billion and $1.80 per share.

With Western and competitor Seagate Technology (STX) now making up 85% of the market for drives, the industry’s consolidation from 90 players in 1988 to just three vendors has created a more stable industry, with commitments by both Western and Seagate to “return a significant portion of cash flows to investors, Schwab notes.

He sees PC sales in 2013 improving from the depressed levels created by the pause before Microsoft‘s (MSFT) introduction of Windows 8 on October 26th:

We believe PC demand in the second half of 2012 was negatively impacted by the mid-Q4 introduction of Windows 8 as well as global macro weakness which impacted spending not only in the US but Europe and China all at the same time. As we progress through 2013, we believe the HDD TAM could improve from expectations of roughly 140 million units in the December quarter.

Schwab also thinks that while solid-state drives (SSD) and “hybrid” drives using a mix of flash and disk, create some risk for traditional discs, nevertheless the risks to Western of such encroachment, and the risk of tablets cannibalizing PCs, are priced into the stock at this point:

We believe hybrid drives could gain significant traction in 2013 with Apple’s introduction of its Fusion drive being a key example. Gartner estimates hybrid drives could grow from roughly 1.8 million units in 2011 to 100 million units in 2016. That being said, this does not change our opinion that the adoption of tablets and smartphones as content viewing devices is certainly impacting PC sales growth but we believe this is well understood and with HDD stocks at 5x EPS, more than priced in.

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